January 24, 2013
SecondMarket Moves into the Primary Market
Posted by Usha Rodrigues

Longtime Glom readers know that I've been interested in the new private secondary markets for quite some time.  Indeed, my summer writing focused on these new markets, where accredited (i.e., wealthy) investors can buy shares of pre-public companies from current shareholders.  Security Law's Dirty Little Secret, forthcoming in the Fordham Law Review, was the result.

In the piece one of the concerns I voice  is that these new markets risk disrupting the "nurturing" model of venture capital.  The dominant VC narrative is that part of what makes Silicon Valley et al. so successful is that venture capitalists bring not only dollars, but also expertise and support, to the entrepreneur.  VCs take seats on a start-up's board and actively advise it on the myriad challenges a fledgling company confronts.  My worry was that the secondary market, by providing an easier exit for venture capitalists and substituting faceless investors for engaged, experienced VCs, risked upsetting the successful Silicon Valley start-up model.

Enter AngelList, a website backed by SecondMarket, one of the two big players in the new secondary market.  According to today's WSJ, AngelList allows angel investors to invest directly in start-ups via the web.  Using this website, accredited investors can buy shares straight from the company.  Investors may never meet or even speak with the entrepreneurs at all.  

 Off the cuff, here are some thoughts:

  • Angels aren't VCs.  The loss-of-expertise point may matter less here.  Angels generally are less active investors than VCs and take fewer control rights, so substituting unknown web investors for angels may not make much of a difference.  Where you come out on this depends upon what kind of intangibles you think angels bring to the table.
  • Small dollar amounts from investors--as low as $1,000, according to the article--may lower the incentives of the angels to monitor any one investment.  The WSJ quotes one investor: "You say how much, hit 'go,' and you're committed," he said. "It's almost as easy as the Amazon one-click checkout."  This ain't you grandmother's--or Peter Thiel's-- angel investment, boys and girls.
  • This money, unlike with the secondary markets, goes straight to the start-ups, and gets there closer to when they need it. That seems like a huge plus.
  • It's more egalitarian. One attraction of Angelist is that it brings the Internet's "cut-the-middleman" angle to angel investing, and makes it less dependant on who you know in the Valley.  
  •  But it's only available to accredited investors, and thus ripe for criticism from two fronts.  First, from the "$1 million ain't what it used to be" crowd, investors with that net worth and/or $200,000 in annual income aren't necessarily sophisticated enough to handle these kinds of risky investments. 
  • On the flipside, if you're intrigued by AngelList, you're out of luck unless you have the money to get in the door.  With more and more Americans qualifying as accredited investors, AngelList is just one more reminder that, when it comes to investing in the U.S., some investors are more equal than others.

 

Entrepreneurship, Small Business, Venture Capital | Bookmark

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